ecnm

Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Economic Concepts ECNM 592

Michael (M.O.) Olabisi, PhD

Wednesdays Spring 2016

Malibu Center

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand Introductions Syllabus Team Assignments & Project Demand

2 Class 2: Costs

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Introductions

Names

Timer

If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions. – Albert Einstein

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Introductions

About the Professor

Tenure-track Full-time Faculty, Economics

Research interests: International Economics, Networks, Economic Development

PhD, University of Michigan

Alumnus of 2 Big Four accounting firms: 2 years in audit (PricewaterhouseCoopers), 4 years in advisory services (KPMG)

Undergrad in Engineering, Masters in Engineering (Cornell University Ithaca NY)

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Syllabus

Syllabus

Section-by-Section

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Syllabus

Due Dates

Due Dates

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Syllabus

Rules of the Road

Think of class as a business meeting - behave professionally

Schedule 10 to 15 hours every week for reviewing class notes/cases, completing readings to prepare for class/quizzes, doing class problems and problem sets

Classes are for active learning: going over lecture notes in detail discussing key concepts group exercises Learning in the course is cumulative - falling behind is not an option.

Teaching Style: Discussion

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Team Assignments & Project

Group Assignments

Students choose own teams - professor sets the diversity parameters

Students manage own teams and team-schedules

Naming teams and team selection must be completed in first hour of first class

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Team Assignments & Project

Team Projects

Students apply the course material to a real-life business issue

Weekly updates required to earn any point for project (see due dates on syllabus)

Students may choose own project by Jan 20, or take Tesla option

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Team Assignments & Project

Course Description

The course shows how microeconomics helps us understand and predict:

Private decision making by consumers and firms Private decision making by employees, competitors, suppliers, etc Public policy (government) decisions and their effect on firms

We explore a new way of thinking about the (business) world!

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Why are we in class today?

Firms only exist if someone will pay for what they produce

Firms need to know why and how people pay for products

Knowing how and why can help make forecasts

Why economics?

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Key Learning Objectives

Demand functions - what they are and how to use them

Shifts of a demand curve vs. moving along a demand curve

Elasticity of demand Income Elasticity of Demand Price Elasticity of Demand

Pricing - the markup rule

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Definitions

consumer’s demand curve shows the quantities that person is willing to buy at every possible price (all else equal)

market demand curve is the total quantity demanded of a product by all consumers in a market at every possible price (all else equal)

firm’s demand curve is the demand for its output only (all else equal)

Demand curves and how they shift

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Demand

Demand/Revenue Definitions

Individual demand curve shows amount of a good the consumer is willing to purchase at a given price (all else equal)

For a given quantity, demand represents the consumer’s willingness to pay (normative definition)

Consumer Surplus

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Demand

Demand Function

In general we want to know relationship between price and quantity, holding other factors constant

As well as the effect of other factors (e.g. advertising)

Demand function: Qd = f(x1, x2, ...)

what variables belong in the function? (relevant x’s)

how does each influence the quantity demanded?

price is usually the most influential x

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Demand Function

Discussion

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Demand

Market Demand

Individual to Market Demand Curve

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Price Elasticity of Demand

Own-price elasticity of demand

Ep = Percent change in quantity demanded

Percent change in price

= ∆Q/Q

∆P/P

= ∆Q

∆P

P

Q

= Slope of Demand Curve* P

Q

Cross-price elasticity of demand Demand is:

inelastic if Ep < 1 elastic if Ep > 1 unit elastic if Ep = 1

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Income Elasticity of Demand

Income elasticity of demand

EI = Percent change in quantity demanded

Percent change in Income

= ∆Q/Q

∆I/I

= ∆Q

∆I

I

Q

Good is: a normal good if EI > 0 an inferior good if EI < 0

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Demand

Income Elasticity: Real Life Example

Example:

China’s grain consumption is growing by 17 million tons a year (about two-thirds of the entire grain production of Australia)... thanks to China’s population moving up the food chain and consuming more grain-based meat, milk and eggs. – China’s growing food demands stoke fears of a global factory farming boom, Quartz 6/25/14

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Demand

Markups

Mark-up is the difference between price and marginal costs, divided by price

The point is: you make a profit by setting price above your costs

Sensible businesses also consider buyers’ willingness-to-pay(WTP) (i.e. EP ) in setting a price

EP or the price elasticity of demand captures how buyers respons to prices

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Demand

Markup Rule

The markup rule: P−MC P

= −1 EP

You have a pure selling problem if MC = 0

If buyers are price-sensitive: set prices high or low?

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Demand

Recap: Key Points

Firms only exist because of willing buyers

An elasticity is the % change in one variable,(e.g. demand,) divided by the % change in another (e.g. price)

Own-price or demand elasticity = (∆Q/Q)/(∆P/P )

Other useful concepts - income elasticity and cross-price elasticity

When demand is elastic (at going prices and quantities) decreasing price leads to higher revenues; when demand is inelastic, price increases lead to higher revenues

Demand functions describe relationships between demand and its drivers (e.g. price)

Demand curves are shifted by many factors: the number of substitutes, consumerâs income etc.

Rational fims make a profit by setting price above costs and low enough to keep buyers willing to pay

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Demand

Prep for Next Class

We will discuss costs!

Read and re-read Chapter 6 before class, there will be a quiz

Revise today’s material, work with your group to outline team report

...Submit team report draft (outline). First submission due next week

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Class 1: Intro and Demand Class 2: Costs Class 3: Competition Class 4: Market Failure Class 5: Information and Decisions Class 6: Capstone Class Class 7: Exams

Outline

1 Class 1: Intro and Demand

2 Class 2: Costs Costs Definitions: Which Costs Matter? Costs: Structure Cost Structure: How and Why Costs Matter

3 Class 3: Competition

4 Class 4: Market Failure

5 Class 5: Information and Decisions

6 Class 6: Capstone Class

7 Class 7: Exams

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